Spill Could Threaten Other Oil and Gas Rigs

Published May 3, 2010 at 9:23 PM | Updated at 9:30 PM EDT on May 3, 2010

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NASA's Aqua satellite captured this image of the Gulf of Mexico on April 25, 2010 using its Moderate Resolution Imaging Spectroradiometer (MODIS) instrument. With the Mississippi Delta on the left, the silvery swirling oil slick from the April 20 explosion and subsequent sinking of the Deepwater Horizon drilling platform is highly visible. The rig was located roughly 50 miles southeast of the coast of Louisiana.

The oil spill in the Gulf of Mexico is approaching the mouth of the Mississippi River, encompassing an area that reportedly is bigger than Puerto Rico, in the heart of the U.S. energy sector.

And, it's already having ripple effects on U.S. oil and natural gas production.

Two offshore natural gas platforms have already been shut down. The rigs represent less than a tenth of one percent of U.S. output, "but are an indication that facilities are at risk," says Lawrence Eagles, head of commodity research at JP Morgan Chase .

Thirteen oil and gas platforms in the gulf are within 50 miles or so of the spill site, although there are no indications that these facilities have been affected by the disaster.

Nearly one-fifth of gulf oil and natural gas output could be in the trajectory of the spill by Tuesday, says meterologist Aaron Studwell at Weather Insight. He estimates about 325,000 barrels a day of crude oil and 1.34 billion cubic feet of natural gas are at risk.

While 13 percent of total U.S. refining capacity is located in the area between New Orleans and Baton Rouge, and the gulf is home to 25 percent of oil production and 15 percent of natural gas output, it is important to keep the safety record of offshore oil and gas rigs in perspective.

The explosion on the BP Deep Horizon rig, which sank to the seabed 5,000 feet below the surface and is spewing an estimated 5,000 barrels of oil a day, is only one well out of 30,000 in the Gulf of Mexico.

The U.S. Minerals and Management Service found there have only been 39 rig blowouts in the gulf 14 years—between 1992 and 2006. As U.S. Interior Secretary Ken Salazar has said "this is a very, very rare event."

Most energy analysts and traders say it's not so much deepwater drilling as the impact on shipping, refining and production closer to shore that's likely to cause oil prices to spike. Mississippi, Alabama and Louisana account for 19 percent of the total U.S. refining capacity. If the oil slick moves east it could interrupt those crude deliveries.

If it drifts west, it could impede ships going up the Mississipi River through the southwest pass. Worse yet, if the Louisiana offshore oil port, the loop, is impacted—that could impact 10 percent of U.S. crude oil imports and about 10 percent of offshore production through pipelines deep under its waters.

None of those areas has been impacted yet, which may be part of the reason why the nearby June Nymex crude futures contract is basically flat trading slightly over $86 a barrel, traders say. Meanwhile, in London, front-month Brent crude prices rallied nearly 1.7 percent Monday and are trading near $89 a barrel.

Some traders say Nymex crude futures for immediate delivery are artificially supressed by record supplies in the U.S. Midwest. But go further out the curve, they say, and Nymex crude oil futures for delivery at the end of this year—for December 2010—are trading around $93 a barrel, up over a dollar or more than 1.5 percent today.

This price difference, traders say, reflects, in part, potential impact of this spill as well as expectatons for global economic recovery.